Morality in the Greek Crisis

I know I keep saying that economics is not a morality play. But when it comes to Greece, I can find no other satisfactory explanation for what is going on.

The harsh treatment meted out to Greece over the last five years makes no economic sense whatsover. It has driven Greece into a deep depression that not only makes its government budget unsustainable but renders its debt unpayable: it has not only caused poverty and distress among Greece’s population, but it has driven businesses into bankruptcy and done serious damage to the supply side of Greece’s economy. And yet creditors want more.

I might agree that reforms to pensions are a good idea. I might also agree with widening the tax base. But not, emphatically not, in an economy as depressed as this. What is needed is debt relief, FIRST. Then real reforms, and help to restore the wanton destruction caused to the economy through ill-considered and frankly vindictive austerity measures.

But debt relief is not on the agenda. The IMF has previously expressed concern about the sustainability of Greece’s debt: but now, returning to the fray after a brief absence, it has compromised its own objectives in order to present a united front with the EU. The Greek side is still asking for debt relief, though not for debt reduction. But its pleas are falling on deaf ears. The reunited Troika continues to insist on austerity measures as a condition of releasing the bailout funds previously agreed.

I’ve reminded everyone before about Irving Fisher’s famous observation: “The more the debtors pay, the more they owe”. In 2012, Michael Hudson developed this idea further. “Debts that can’t be paid, won’t be”, he said. And he went on:

Today’s financial trend threatens to reverse this pro-debtor reform tendency. Without acknowledging the economic and social consequences, the “business as usual” approach is a euphemism for sacrificing economies to creditors. It seeks to legitimize the disproportionate gains of banks and their rentier partners who have monopolized the past generation’s surplus…… The aim in practice is to impose austerity and economic shrinkage on the private sector, while the public sector sells off its assets in a voluntary pre-bankruptcy.

The internal contradiction in this policy is that austerity makes the debts even harder to pay. A shrinking economy yields less tax revenue and has less ability to create a surplus out of which to pay creditors. Debt repayment is not available for spending on current goods and services. So markets shrink more.

If what you want is debts paid back, austerity is bad medicine.

But I said this was a morality play. The standard story goes that lazy, ne’er-do-well Greeks borrowed and spent excessively to support a lavish lifestyle well beyond their means. And to make matters worse they lied about their true financial position in order to gain admission to the Euro club. Unsuspecting German and French banks lent to them believing they were financially in better shape than they actually were. And when the Greeks finally admitted they couldn’t actually pay the money back, hard-working thrifty Germans had to bail them out. Now the Greeks are complaining about the reforms that the virtuous Germans and saintly official creditors are requiring of them. But they are only pretending to do reforms, In reality they are still shirking. No wonder the creditors’ patience has run out. The Greeks just can’t be trusted.

I hear this story a lot. But it’s not true. And even if it were, it would not be helpful. It could equally be argued that Greece was sold a lie by the promoters of the Euro, since it was led to believe that Euro membership was the path to future prosperity. How was it to know that the abject failure of France, Germany and the UK to control their banks meant that naive Greeks would be at the mercy of predatory lenders? See, it looks different framed like that, doesn’t it? And it is a bit rich to regard the official creditors as “saintly”, too. They lent foolishly, in contravention of their own rules, to banks that had lent profligately and gained disproportionately. In so doing, they became what Hudson describes as “rentier partners” to those banks. Why should they not now take the losses that they should have inflicted on the banks in 2010?

The constant presentation of Greeks as intrinsically untrustworthy is profoundly damaging to the social cohesion of Europe. Unpayable debts do not arise from moral defect: Greeks are no more untrustworthy than anyone else. I do wish Germans would remember their own history. It is not so long since Germans were regarded in much the same way as Greeks are now. This is Keynes describing the attitude of the French statesman Clemenceau to Germans:

He was a foremost believer in the view of German psychology that the German understands and can understand nothing but intimidation, that he is without generosity or remorse in negotiation, that there is no advantage he will not take of you, and no extent to which he will not demean himself for profit, that he is without honour, pride or mercy. Therefore you must never negotiate with a German, or conciliate him; you must dictate to him. On no other terms will he respect you, or will you prevent him from cheating you.

Germany was loaded with unpayable reparations after World War I partly because of attitudes like these…… and we all know where that led, don’t we?

Brian Lucey reminds us that after World War II, Germany was forgiven the majority of its debt. It also received aid from the US to restore its economy – the Marshall plan. Yet now it refuses to consider further debt relief for Greece, let alone aid. Instead, it insists on harsh austerity measures, even though they make it even less likely that Greece will pay its debts. This, coupled with the disparaging language that is routinely used about Greeks and the wilful ignoring of their terrible economic plight, smacks of a desire to inflict punishment rather than any genuine interest in reform.

But punishing people – or nations – for running up unpayable debts actually doesn’t sit well with a moral stance, particularly one that is supposedly founded on Christian values. Jesus has quite a bit to say on unpayable debts:

The kingdom of heaven is like a king who wanted to settle accounts with his servants. As he began the settlement, a man who owed him ten thousand bags of gold was brought to him. Since he was not able to pay, the master ordered that he and his wife and his children and all that he had be sold to repay the debt. At this the servant fell on his knees before him. ‘Be patient with me,’ he begged, ‘and I will pay back everything.’ The servant’s master took pity on him, cancelled the debt and let him go.

But when that servant went out, he found one of his fellow servants who owed him a hundred silver coins. He grabbed him and began to choke him. ‘Pay back what you owe me!’ he demanded. His fellow servant fell to his knees and begged him, ‘Be patient with me, and I will pay it back.’ But he refused. Instead, he had the man thrown into prison until he could pay the debt.

When the other servants saw what had happened, they were outraged. They went and told their master everything that had happened. Then the master called the servant in. ‘You wicked servant,’ he said. ‘I cancelled all that debt of yours because you begged me to. Shouldn’t you have had mercy on your fellow servant just as I had on you?’ In anger his master handed him over to the jailers to be tortured, until he should pay back all he owed.

Matthew 18:21-35, NIV

I’m not at all sure what Jesus would have to say about the treatment of Greece by its creditors. Whatever happened to forgiveness?

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Author: Frances CoppolaFrances Coppola, a former banker, is a writer, singer and twitterer extraordinaire. Coppola Comment is her main blog, which started out as a place where she could ramble on about anything that interested her. These days the posts on the site are entirely about matters financial and economic. She does not talk about her personal life or beliefs unless they are relevant to a financial or economic matter. Frances is politically non-aligned and economically neutral (She does not regard herself as "belonging" to any particular school of economics). And she does not give investment advice.